Spirited Move

The first clarification from UB Group Chairman Vijay Mallya, after he announced the sale of a controlling stake in United Spirits Ltd (USL) to Diageo Plc, was that the funds from the deal need not flow to the ailing Kingfisher Airlines. This means either Mallya will continue to scout for a strategic investor for the airline or he has other plans he has not revealed yet.

The comments should worry Kingfisher’s lenders, vendors as well as employees, the last of whom have not been paid for six months. The grounded airline owes about `7,000 crore to 17 banks, including `1,500 crore to State Bank of India. It has accumulated losses of `10,000 crore.

The USL-Diageo transaction, viewed without the debt-laden airline in context, was a masterstroke for Mallya in many ways. “This was a brilliant transaction. It potentially makes USL-Diageo the most powerful consumer brand in the country,”says Nikhil Vora, Managing Director at IDFC Securities. “The promoters command a better valuation now than before the deal.”

That indeed is the case. The deal was announced after market hours on Friday, November 9. Shares of USL soared 35 per cent on Monday, November 12. So far this year, the shares have jumped nearly four fold. On January 2, shares of USL touched a one-year low of `477.70 on the National Stock Exchange. At that price, the promoters’ 27.8 per cent stake in USL was worth `1,740 crore. On November 15, a day before this magazine went to press, the company’s shares climbed to `1,954.00.

The deal involves Diageo paying`5,725 crore for a 27.4 per cent stake in USL. This will be done in two stages. Diageo will first pay `3,635 crore to acquire 19.3% of USL. The bulk of this will come from United Breweries (Holdings) Ltd, the group’s holding company, and Kingfisher Finvest, a promoter group company. In the second stage, USL will issue new shares equal to 10 per cent of its expanded equity base to the UK company. Diageo will then make a man- datory open offer to buy another 26 per cent from USL’s public shareholders. Diageo is aiming for a stake of up to 53.4 per cent in USL while Mallya will eventually have 13.4 per cent.

The transaction will benefit the industry as well. “I think this will be good for the Indian market as Diageo will be more focused on bottom line rather than top line growth,” says Kishore Chhabria, Chairman of Allied Blenders & Distillers. Chhabria had been Mallya’s business partner and is now a competitor.

The deal, however, will help little in reviving the fortunes of Kingfisher Airlines. Analysts say Mallya was pursuing a deal with Diageo because USL itself requires capital and has a debt of `8,300 crore. In fact, UB (Holdings) and Kingfisher Finvest have pledged almost their entire stake in USL to take on loans. The entire amount raised from the deal will not be used to revoke all those pledges. This is because the deal was struck at a price higher than the value of the pledges, say analysts.

Mallya will have some cash left over even after revoking the pledges, but he might not pour this into his airline. “Mallya is not na?ve to use the money he got from the deal to pay off Kingfisher’s liabilities,”says R. Ramakrishnan, an independent chartered accountant in Bangalore who has analysed Kingfisher finances. Investors have few details about the pledges. “We have no clue to whom these shares have been pledged and how much loans raised,”says Shriram Subramanian, Managing Director at InGovern Research Services, a proxy advisory in Bangalore. “Deconstructing the group’s holdings, cross-holdings and share pledges is a complex exercise.”

IDFC’s Vora wonders why banks did not enforce the collateral and force the UB Group to sell its entire stake in USL to recover their loans. A senior official at a state-run lender to Kingfisher says banks did not intervene during talks between UB Group and Diageo as they did not want the deal to be derailed.“The banks get nothing if Diageo had walked out of this,” he says. The official adds that banks will pursue a strategy to help revive the airline and recover their dues. “That strategy may or may not work, but we are taking a risk,” he says. State Bank of India Chairman Pratip Chaudhuri, however, has said Kingfisher “will not fly” if it does not bring in fresh equity by November 30.

People tracking Mallya’s businesses believe he is unlikely to take any step in haste to revive Kingfisher.“I will do what is best for Kingfisher at the appropriate time,” he told NDTV television network after the Diageo deal. Lenders to Kingfisher, meanwhile, are likely to take a big hit given the airline’s woes.